1. Geopolitics of Energy
The Saudi oil war against Russia,
Iran and the US
Francesco Legname
January 2016

2. Author: Francesco Legname 2
The House of Saud is applying a highly predatory pricing strategy, which aims at reducing
market share of its competitors, in the middle- to long-term. At least in theory, this could
make life miserable for a lot of players – from the US (e.g. fracking and deepwater drilling
become unprofitable) to producers of heavy, sour crude such as Iran and Venezuela. Yet the
key target, make no mistake, is Russia.
The House of Saud’s target of trying to bypass Russia as a top supplier of oil to the EU is
nothing but a pipe dream; EU refineries would have to be reframed to process Saudi light
crude, and that costs a fortune.
Geopolitically, it gets juicier when we see that central to the House of Saud strategy is to
stick it to Washington for not fulfilling its “Assad must go” promise, as well as the neo-con
obsession in bombing Iran. It gets worse (for the Saudis) because Washington – at least for
now – seems more concentrated in toppling Caliph Ibrahim than Bashar al-Assad, and might
be on the verge of signing a nuclear deal with Tehran as part of the P5+1 on November 24,
2015.
On the energy front, the ultimate House of Saud nightmare would be both Iran and Iraq
soon being able to take over the Saudi status as key swing oil producers in the world. Thus
the Saudi drive to deprive both of much-needed oil revenue. It might work – as in the
sanctions biting Tehran even harder. Yet Tehran can always compensate by selling more gas
to Asia.
So here's the bottom line. The House of Saud believes it may force Moscow to abandon its
support of Damascus, and Washington to scotch a deal with Tehran. All this by selling oil
below the average spot price. That smacks of desperation.

3. Author: Francesco Legname 3
Russia, meanwhile, increasingly looks to East. China’s Vice Premier Wang Yang has neatly
summarized it: “China is willing to export to Russia such competitive products as agricultural
goods, oil and gas equipment, and is ready to import Russian engineering products.” Couple
that with increased food imports from Latin America, and it doesn’t look like Moscow is on
the ropes.
The central banks of China and Russia have just signed a crucial, 3-year, 150 billion Yuan
bilateral local-currency swap deal. And the deal is expandable.
This new deal, crucially, bypasses the US dollar. No wonder it’s now a key component of
the no holds barred proxy economic war between the US and Asia. Moscow cannot but
hail it as sidelining many of the side effects of the Saudi strategy.
The Russia-China strategic partnership has been on the up and up since
the “epochal” (Putin’s definition) $400 billion, 30-year “gas deal of the century” clinched in
May.
Moscow is progressively lifting restrictions and is now offering Beijing a wealth of potential
investments. Beijing is progressively accessing not only much-needed Russian raw materials
but acquiring cutting-edge technology and advanced weapons.
Presidents Putin and Xi, who have met no less than nine times since Xi came to power last
year, are scaring the hell out of the “Empire of Chaos”. No wonder; their number one shared
priority is to dent the hegemony of the US dollar – and especially the petrodollar - in the
global financial system.

4. Author: Francesco Legname 4
The Yuan has been trading on the Moscow Exchange - the first bourse outside of China to
offer regulated Yuan trading. It’s still at only $1.1 billion (in September). Russian importers
pay for 8 percent of all Chinese goods with Yuan instead of dollars, but that’s rising fast. And
it will rise exponentially when Moscow finally decides to accept Yuan under Gazprom’s
$400 billion “gas deal of the century.”
Russia and China intend to increase the amount of trade settled in the Yuan, President
Vladimir Putin said in remarks that would be welcomed by Chinese authorities who want
the currency to be used more widely around the world.
Curtailing the dollar's influence fits well with China's ambitions to increase the influence of
the Yuan and eventually turn it into a global reserve currency. With 32 percent of its $4
trillion foreign exchange reserves invested in U.S. government debt, China wants to curb
investment risks in dollar.
The quest to limit the dollar’s dominance became more urgent for Moscow in 2014 when
U.S. and European governments started imposing sanctions on Russia over its support for
separatist rebels in Ukraine. Russia, third-largest oil producer, is now settling all of its crude
sales to China in renminbi, in the most clear sign that western sanctions have driven an
increase in the use of the Chinese currency by Russian companies. Russian executives have
talked up the possibility of a shift from the US dollar to renminbi as the Kremlin launched a
“pivot to Asia” foreign policy partly in response to the western sanctions against Moscow
over its intervention in Ukraine.
Gazprom Neft, the oil arm of state gas giant Gazprom, since the start of 2015 had been
selling in renminbi all of its oil for export down the East Siberia Pacific Ocean pipeline to
China. Russian companies’ crude exports were largely settled in dollars until the summer of
2014, when the US and Europe imposed sanctions on the Russian energy sector over the
Ukraine crisis. Gazprom Neft responded more rapidly than most, with Alexander Dyukov,
chief executive, announcing in April 2014 that the company had secured agreement from 95
per cent of its customers to settle transactions in euros rather than dollars, should the need
to do so arise. With that, the "Petro Yuan" has officially been born.

5. Author: Francesco Legname 5
This is the way the multipolar world goes. The House of Saud deploys the petrodollar
weapon? The counterpunch is increased trade in a basket of currencies. Additionally,
Moscow sends a message to the EU, which is losing a lot of Russia trade because of
counter-productive sanctions, thus accelerating the EU’s next recession. Economic war does
work both ways.
The House of Saud believes it can dump a tsunami of oil in the market and back it up with a
tsunami of spin – creating the illusion the Saudis control oil prices. They don’t. As much as
this strategy will fail, Beijing is showing the way out; trading in other currencies stabilizes
prices. At the same time, Iran's re-entry to the market may cause a readjustment
of production targets, which would lead to a short-term decline in output as Iran grows its
output and waits for the lifting of sanctions on its oil. The only losers, in the end, will be
those who stick to trade in US dollars.
Meanwhile, Saudi Arabia is facing pressure from other OPEC members, as low oil prices are
beginning to hurt their fiscal budgets. The oil price collapse is having a devastating impact on
all of the worlds’ major oil producers. With its history of booms and busts, the oil industry, is
in its deepest downturn since the 1990s, if not earlier. It's not just a case of what is the
break-even price but the price necessary to finance government budgets that are now in
deep deficits, which has been triggering increasing global instability as the price has slid to
$30. In fact the budgets of virtually every major oil producer requires an oil price north of

6. Author: Francesco Legname 6
$80 just to break-even. With several such as Russia requiring $100+. Furthermore the oil
price slump of 2015 has played a large part in sparking economic mass migration out of
African oil producers such as Nigeria whose government requires an oil price of $120 to
balance it's budget.
Russia's 2016 budget -- over half of which relies on revenues from oil and gas exports -- is
based on an oil price of $50 a barrel and a deficit of three percent, which President Vladimir
Putin has ordered must not be exceeded. But crude prices in mid January dipped below $30
a barrel for the first time in over 12 years and former finance minister Alexei Kudrin
estimated that deficit could grow to over five percent if they stay at their current levels.
Anton Siluanov, Russia’s Finance Minister, announced the oil price would have to rise to $82
to fully balance this year's budget.
Besides, the ruble has already fallen over 20%-25% percent since July 2015 against the US
dollar. By the way, the currencies of key BRICS members have also fallen; And Russia, unlike
the Yeltsin era, is not broke; it holds at least $455 billion in foreign reserves.
Thus Russia, the worlds third largest oil producer and second largest exporter, remains in
war mode so as divert the attention of the Russian people away from an economy in
meltdown as Czar Putin turns his military ambitions far beyond the Ukrainian war zone by
expanding his military operations into Syria under the cover of fighting jihadists. The truth is

7. Author: Francesco Legname 7
that Russia's war in Syria is primarily concerned with doing damage to the European Union
and secondly undermining the U.S. presence in the region.
To illustrate the crisis that Russia faces is the fact that Russia requires an oil price of around
$105-110 to balance its finances and for every $1 below that range Russia loses an
estimated $2billion about in revenues, worst still is that the Russian industry needs an oil
price of $20 just to break-even which could be hit this year. With crude oil currently trading
at $30 that's a huge revenue loss of well over $160 billion per annum that has plunged the
Russian economy into recession for the whole of 2015 that looks set to further intensify
during 2016 as Russia's hard earned foreign currency reserves look set to have completely
evaporated before the end of 2016.
Most will be unaware that China is the world's fourth largest oil producer, though all of it is
for domestic consumption and even more is imported. The economic slowdown in China is
one of the primary drivers for the collapse in the global oil price, which is also making it felt
in the global stock markets. So whilst lower oil prices should act to support the Chinese
economy, other drivers such as over capacity far surpass the low oil price stimulus that
shows no signs of recovering for much of 2016. In fact low oil price will be hurting Chinese
producers and refiners just as badly as western oil majors, that likely are already being
propped up by the Chinese government which means despite being a heavy consumer,
China also needs an oil price floor of about $40 below which the pain tends outweigh the

8. Author: Francesco Legname 8
gain. So China does not look set to spark a fundamental turn around in crude oil demand
for much of 2016. In terms of instability, a weak economy is likely to further encourage the
Chinese Empire emboldened by a new fleet of air craft carriers to continue to assert its
dominance over the Asian region the most evident example of which is the construction of
artificial islands on reefs in the South China Sea an area claimed by several other nations
including the Philippines and Malaysia that could prove a flash point between U.S. and
Chinese vessels.
The continuing thawing of Iran / U.S. relations implies the potential for an huge increase in
the supply of oil out of Iran which has the worlds’ fourth largest oil reserves and second
largest gas reserves. The OPEC member nation accounts for 10% of the global crude oil
reserves and 13% of OPEC’s crude oil reserves. Iran’s production peaked at 5.5 (million
barrels per day) during the late 1970s. However, war and lower investments in Iran led to a
drop in Iran’s crude oil production. Since 2011, crude oil production in Iran has fallen due to
Western oil sanctions. The easing of sanctions would therefore mean Iran could scale up
crude oil production by 0.5 MMbpd (million barrels per day) to 1 MMbpd in the next six
months to one year. Meanwhile, Iran produced 2.8 MMbpd of crude oil in November 2015.
Lifting of sanctions means that even if Iran does not actually turn on the taps, just the ability
to do so at anytime will be enough to keep oil prices depressed for virtually the whole of
2016. Especially given the internal and external pressures pulling on Iran to raise more
revenues such as the Iran's proxy wars against Saudi Arabia in Syria and Yemen whilst at the
same time retaining its influence and network of control over Shia Iraq.

9. Author: Francesco Legname 9
Those who have been looking to Saudi Arabia for signs for a cut in production have been
greatly disappointed as instead Saudi Arabia has ramped up production to 10.2m b/d
compared to 9.6m b/d a year ago and thus further contributing to the worlds crude oil glut
that is seen by much of the media as part of a 'War on U.S. Shale oil industry' aimed at
annihilating competition such as that from the fracking industry.
However, despite $620 billion of reserves most of which is parked in its sovereign wealth
funds, Saudi Arabia is not immune to the instability triggering consequences of the oil price
collapse, which is seeing Saudi Arabia's wealth disappearing at the rate of about $100 billion
per annum as the Kingdom is reliant on oil exports for 85% of its revenues. In fact rather
than reigning in government spending, Saudi Arabia is engaged in two costly major proxy
wars against Iran in Syria and Yemen and each passing day brings increasing risks of a hot
war between Iran and Saudi Arabia that would probably trigger at least a temporary
speculator driven spike in oil prices. So rather than Saudi Arabia using oil prices to kill off the
competition the real story is more of a totalitarian state being destabilized by the oil price
collapse that is fighting multiple proxy wars and an internal insurgency, as it should not be
forgotten that Saudi Arabia is a family dictatorship that is only able to retain power by
means of terror and bribery of ordinary Saudi citizens with oil money that is fast running out
of. So in the grand scheme of things the U.S. shale industry is way down on the priority list
of worries for the Saudi totalitarian regime.

10. Author: Francesco Legname 10
The reality of the Saudi Arabia is one of a regime that is rotten to its very core, that literally
has hundreds of wannabe Al-Saud Saddam Hussain types running around trying to stoke the
fires of sectarian conflict both in neighboring states and within Saudi Arabia itself, who are
increasingly wielding power against a fragile center that sows the seeds for what is
unthinkable today that of a revolution or even civil war, let alone the possibility of a hot war
against Iran. Given the fact that Saudi Arabia has not cut oil production to date is very telling,
in that it shows that the Saudi totalitarian Islamic fundamentalist state fears three things:
1. Its people
2. Its oil is becoming obsolete / worthless as a consequence of new renewable energy
sources prompted by climate change.
3. Anything Shia, which the Saudi wahabi ideology perceive as apostates.
Which means no matter how loudly other OPEC members scream at Saudi Arabia to cut
production, it's just not going to happen, in fact I would not be surprised if we find out in a
few months time that Saudi Arabia has further increased production in an attempt to
monetize the oil in the ground whilst it still has customers for it and ahead of Iran opening
the taps. This illuminates why Saudi Arabia in January 2016 announced intentions to put its
oil industry (Aramco) on sale, which is because it understands that the nations 266 billion
barrels of oil in the ground could become worthless long before it can be produced and
sold, so instead are trying to forward sell Saudi Arabia's oil reserves to clueless investors. By
the end of 2016 some of these Al-Saud wannabe Saddam Hussain's will have made enough
of a name for themselves so as to make it into the mainstream media as they leave their
finger prints as the instigators of regional instability through extreme acts of violence of
which the recent executions were just a taste of what is to follow.
Iraq is still desperately trying to rebuild its devastated cities after the U.S. and allies went on
a decade long rampage across the nation all on the basis of lies such as that its was for 9/11
or that there were weapons of mass destruction ready to hit Europe within 45minutes, the
consequences of which still continues plague Iraq to this day which remains a divided nation
of between Sunni's and Shia's. After America's departure the one hope that Iraq had
towards building a better more stable future was Iraq's huge oil reserves which given a price
of $100 would be more than enough for the central government to paper over the cracks
and buy off the various competing factions with petro dollars. However, again despite a low

11. Author: Francesco Legname 11
break even price of $12, $30 is just not enough to meet the requirements for a fragile Iraq
which implies that 2016 could turn out to be just as bad a year for Iraq as was 2015, as the
factions such as the Kurds, and various Sunni and Shia militias attempt to seize control of the
oil producing regions resulting in continuing sectarian warfare. In fact the Kurds by the end of
2016 could come to be seen in a similar manner as ISIS is today, as Kurdistan seeks to
control Iraq's northern oil fields and take all of the revenues from themselves therefore
risking a Shia Iraq / Kurd war.
The consensus view in America is that Saudi Arabia is engaged in an oil war to knock out
America's shale oil industry. However, when one looks at the facts the reality is more like
the US oil war on Saudi Arabia as evidenced by the fact that it is the United States which
has effectively doubled its oil production over the past 10 years from 4.5 million barrels a
day to over 9 million today that virtually rivals that of Saudi Arabia which is producing little
more than it was 10 years ago (10.2 against 9.7 10 years ago).
This view whilst obvious remains invisible to a propaganda driven mainstream press that
instead of reflecting reality instead peddles and regurgitates the view that it is all Saudi
Arabia's fault. The U.S. shale oil production peaked during 2015 at approximately 5.7 million
barrels per day and today has declined to 5.15 million barrels a day, with expectations for
the decline to steepen during 2016 in response to a sustained low oil price resulting in a
bloodbath amongst the US shale oil industry that could kill off half of the industry this year

12. Author: Francesco Legname 12
leaving output at least 2m b/d lower at approximately 3m b/d. Therefore US total oil output
could fall to approximately 7m b/d by the end of 2016. Whilst the majors should fair better
having locked in prices for multiple years as high as $60, nevertheless will be scrapping
hundreds of billions in exploration and drilling projects during 2016 resulting in further job
losses. So on the basis of fundamentals there is little sign for an end to low prices any time
soon as it will be slow grinding process of wiping out approximately half of the US shale
industry which is the only peaceful method of bring price stability to the oil market. Which
means any bottom in the crude oil price is unlikely to spark a return to anywhere near the
likes of $100 with a real risk that the crude oil price could sink even lower, as given these
fundamentals $20 is very possible (60% probability), and whilst today it is difficult to imagine
the oil price trading as low as $10 as some suggest (Standard Chartered), nevertheless it is
no longer impossible (20% probability).